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The Current Financial Crisis Essay

856 words - 3 pages

Frederic Mishkin makes the point in the text, The Economics of Money Banking, and Financial Markets (2010) that “Banks and other financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities.” (p.7). The movement of funds between savers and those with productive investment opportunities is the means of creating growth. When people lose confidence in the economy this activity freezes or weakens, consequently, asset prices decline, unemployment rises and companies default as was the case of Lehman Brothers in 2008. The freezing of the flow of money is a financial crisis. Today, the global flow of money is at risk.
This risk is a result of Debt and Credit imbalances: "Persistent trade surpluses in some countries and deficits in others did not reflect a flow of capital to countries with profitable investment opportunities, but to countries that borrowed to finance consumption or had lost competitiveness. The result was unsustainably high levels of consumption (whether public or private) in the US, UK and a range of other advanced economies and unsustainably low levels of consumption in China and other economies in Asia, and some advanced economies with persistent trade surpluses, such as Germany and Japan."
The debt and credit imbalances have created global systemic risk as economic markets have become more interdependent. The European debt crisis constantly weighs on global markets. The fall of Lehman Brothers in 2008 highlighted the systemic risk of institutions that were deemed “Too large to fail.” The European debit crisis highlights the risk to the global economy should specific countries or currencies fail. As the world becomes more interdependent, monetary policy throughout the world impacts our own economy. Europe and China are major economies that impact the world.
Europe's challenges with the Euro are complicated. The United States congress had trouble agreeing to enact legislature to raise its debt ceiling in order to meet its obligations and maintain its credit ratings. In Europe, separate countries need to agree to come together with a combined political will to stabilize countries and banks in financial trouble. Without the power to print money individually, each country under the single currency must come together under combined policies. Today, Europe seems willing to reach combined policy decisions to avoid an economic disaster. Ultimately, if this happens, the Euro will have a stronger future just as the United States gained...

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